Despite new policies and legislation resulting in a positive impact on railways in 2018, some difficulties have emerged, creating a bumpy path for the private sector to enter into the industry.

Further planning and a completed regulatory framework are required to encourage private investment in railways

Despite several months passing, state-owned railway giant Vietnam Railways (VNR), the operator of all train lines in the country, is still waiting for the Ministry of Transport’s (MoT) approval regarding the investment plans on two new projects: upgrading the Vinh-Nha Trang route and the Nha Trang-Saigon route.

Receiving such late approval may delay the ground-breaking until the end of 2019 at the earliest, instead of the June 2019 date as previously planned.

Thus far, the MoT is said to have approved the investment plan of only the Hanoi-Vinh section, which is to be one of two carried out by the Project Management Unit (PMU-Rail). This section is to be one of the four projects funded by the VND7 trillion ($304.35 million) G-bond bundle.

At present, PMU-Rail is planning ahead for the Hanoi-Vinh project. The building, appraisal and approval of the feasibility study, construction designs, and then selection of the contractor are to follow.

New opportunities taking time

A senior MoT official blamed the delay on the approval to appraise related works in the projects. He, however, declined to give further details. Regardless of the reasons, potential businesses will have to wait an additional six months.

These four projects are expected to bring about fresh business opportunities for domestic and international groups who are seeking to venture further into the industry. However, they might have to hold their plans until the end of 2019 or early 2020 to know more about the possibilities.

“For the new projects, international railway businesses can join by joining tenders to supply materials and equipment for us,” VNR chairman Vu Anh Minh told VIR.

More fresh opportunities are expected to become evident in the coming months, as the country puts the finishing touches on preparations to kick off some sections of the North-South high-speed railway project under the public-private partnership (PPP).

VNR will also continue to upgrade stations and logistics facilities, while studying the possibilities of developing stations that enjoy commercial advantages.

According to the Vietnamese railway development strategy, the industry is estimated to require VND110 trillion ($4.78 billion) by 2030 to revamp the existing network, of which VND48 trillion ($2.08 billion) will be needed by 2020. It is therefore willing to work with international partners to carry out and to supply equipment and spare parts for future projects.

In spite of the huge business potential, private investors will have to wait for the completion of some regulatory frameworks which are currently in the pipeline.

The government’s Decree No.46/2018/ND-CP governing the management and use of railway infrastructure assets are considered groundbreaking rules for the railway sector and VNR, which has for years been the only manager and operator of state-owned national railway assets. Accordingly, under Decree 46, national railway infrastructure assets are divided into two categories. The assets directly used for train operation (railways, bridges, tunnels, and rails) and the assets indirectly used for train operation (the station square, warehouses, inland container depots (ICDs), and service and training facilities at railway stations. The assets indirectly used for train operation will be handed over to VNR to own, use, and develop the equivalent state capital.

The move will enable the giant to take the initiative with its investment plans and call for private investment. For example, as VNR owns a land lot, it could reach agreements with credit organisations to develop infrastructure more easily.

“For the assets indirectly used for train operation, the railway operator plans to cooperate with other investors to invest in developing ICDs and warehouses along the railway network from Song Than station in the southern province of Binh Duong to Dong Anh station in Hanoi and then to Lao Cai and Dong Dang to increase transportation capacity,” Minh said.

However, to realise this, a master plan on how to use and develop the railway assets in line with Decree 46 should be completed by April 2019 on schedule. Only when it is released, will a sufficient legal mechanism be available for VNR and its private partners to make the next steps.

Foreign investors and private businesses are also looking towards 2020 when VNR will dump its monopoly in cargo transport by merging with Hanoi Railway Transport JSC and Saigon Railway Transport JSC into one joint stock company (JSC). This JSC would then be separated into two, with one part specialising in passengers, in which VNR would hold a controlling stake, and another part focusing on cargo transport with VNR possibly divesting the entire stake.

New approach

The Vietnamese railway industry, which performed better in 2018, with revenues estimated to have risen by 8-10 per cent on-year, has been attracting growing interest among international businesses. Many are seeking business opportunities in anticipation of huge future demands to upgrade and develop the system.

As a universal rule, attracting foreign investment into the railway industry is a challenge, with the same proving true for Vietnam with no foreign investment being made so far.

For years, with projects that upgraded railway lines and tunnels, VNR seemed to have no plans to contract foreign investors, preferring instead to work with local contractors. Therefore, there has been no investment opportunities for foreign businesses to get involved in.

Industry insiders said that despite recently initiated unique preferential mechanisms for the railway industry, including an exemption from import duties, corporate income tax, loans, and land use rent, they have not been enough to attract foreign investors. There is still a lack of incentives and risk-sharing mechanisms between the government and investors.

International businesses are heading to co-operate with VNR to provide equipment and spare partners to serve its revamp.

Recent moves from the French National Railway Company, a world leader in high-speed rail, Tractebel Engineering, and other French firms show the business trend in the local railway industry. They are looking to supply equipment and spare parts for railway projects.

Earlier the likes of Siemens, Lotte Group and others from Russia also noted their strong interest in the nation’s railway industry.

Investment incentives under the Law on Railways 2017

Railway investment projects are eligible for special investment incentives as follows:

- Import duty: Exemption from import duty on goods imported to create fixed assets of the railway project, including an exemption within five years from the start of production for raw materials, materials, components, and equipment necessary for the construction of the railway project which cannot be produced domestically.

- Corporate income tax (CIT): CIT is reduced to 10 per cent for 15 years, extendable by up to 15 years with the prime minister's approval, while exempting for the first four years and a 50-per-cent reduction in the subsequent nine years.

- Land use levy/rent: Railway projects are entitled to land allocation without land levy of the land area used for construction of national and urban railway infrastructure.

- Loans: Concessional loans at preferential interest rates from the state’s investment credit sources or government-guaranteed loans for investment in the development of national and urban railway infrastructure; the procurement of railway vehicles, machines, and equipment for railway maintenance; and the development of the railway industry.

- Other incentives: Availability of the entire amount of funding for site clearance of the land area for rail transport that is used for construction of railway infrastructures from the state and provision of an exclusive radio frequency in service of the rail transport administration and access to the traction power network in service of train operations.